We will be sending Tax Alerts out for the rest of the year to give our clients information on the 2018 tax laws. Each Alert will have two articles, one for businesses and one for individuals. Be aware that there are many grey areas of the new tax law, which, have yet to be defined and ruled upon by the IRS. The IRS is spending $300 million to address these TCJA issues. They did not start until after tax season, so very little has yet to be pronounced by the IRS. The articles we post are based upon the consensus of experts at this point in time. I will keep you advised as rules and definitions come forth from the IRS.
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2018 DEPENDENT TAX CREDITS
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Higher Credit
Under tax reform, the Child Tax Credit may be worth as much as $2,000 per qualifying child depending upon your income – that’s twice as much as before. A qualifying child for this credit must meet
all
of the following criteria:
- The child must be under age 17 – age 16 or younger – at the end of the tax year
- The child must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always considered your own child
- The child must not have provided more than half of his/her own support
- You must claim the child as a dependent on your federal tax return
- The child must be a U.S. citizen, U.S. national, or U.S. resident alien and you must provide a valid Social Security number (SSN) for the child by the tax return due date
- The child must have lived with you for more than half of the tax year (some exceptions apply).
Partially Refundable
In prior years, the Child Tax Credit was nonrefundable which means that if your Child Tax Credit exceeded your tax liability, your tax bill was simply reduced to zero and you did not get a refund of the unused credit. For 2018, depending on your situation, up to 70% of the credit is refundable, regardless of the amount of your tax liability.
Higher Phase-Out
In 2017 your Child Credit began phasing out when single filers Adjusted Gross Income (AGI) went over $75,000 and when joint filers’ AGI went over $115,000. The tax reform raises the phase out AGIs to $200,000 for single filers and $400,000 for joint filers. Therefore, many more taxpayers will qualify for the Child Tax Credit in 2018 than in 2017.
In general, most families (singles with AGI less than about $170,000 and joint filers with AGI less than around $340,000) will find the Child Credit will lower their taxes in 2018 vs. 2017.
Family Credit
For 2018, there is a $500 non-refundable Family Credit for qualifying dependents other than qualifying children. This Family Credit allows you to claim a credit for other dependents in your household that don’t meet the definition of qualifying child. The credit is clearly intended to make up for the fact that you no longer have the ability to claim exemptions, for other dependents (like children age 17 -24 or your parents) on your tax return as personal exemptions since all exemptions have been eliminated. However, the $500 credit will fall short of covering the loss of exemptions in the case of single filers with an AGI over about $51,000 or Married filers with an AGI over around $90,000.
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The new flat tax rate of 21% for C-corporations was good news, except for small businesses. C-corporations with less than $90,000 in taxable income will actually be paying more taxes because they will lose the benefit of the old 15% tax rate on the first $50,000 of taxable income.
Under the new law small C-corps with under $50,000 in taxable income for 2018 will actually pay 40% more in federal income taxes than they would have paid using the 2017 tax rates, which equates to $3,000 more taxes in 2018 on $50,000 of taxable income.
However, changing a small C-Corp’s entity type may be more costly over the long run, than it’s worth. With both individual and corporate tax rates being changed it will be more complex to analyze which entity is best for a given set of circumstances. Beside the changes in corporate and individual tax rates, the tax reform has changed many fringe benefits and the deductibility of Net Operating Losses (NOL) has been modified.
Also there are many grey areas in the new law for both businesses and individuals, that have yet to be clarified by the IRS. So the moral of the story is, don’t make changes to your business until we know all of the rules.
Special Note
: In our last Tax Alert we talked about how the deductibility of meals and entertainment have changed, but we neglected to remind all businesses to make sure you keep your costs for entertainment separate from you meals. In the past many businesses have on general ledger account called Meals & Entertainment (M&E) so make sure you one account for
Meals
and one account for
Entertainment
.
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Be sure to
check our website
often, as we will be posting tax articles and IRS updates over the next few months, covering both business and individual changes to the 2018 tax laws.
Peace,
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James A. Volz, CPA
jim@volzcpa.com
794-1551
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